Financial advice is often camouflaged. Would you have your electrician design and build your house if they charged no additional fee? At least none that you could see? While they may be a great electrician, what are their credentials for the other two functions? What about asking a general contractor do design your custom house? While some architects have passed board exams validating their expertise, the electrician probably has not. In fact, I know of general contractor who believes architects really aren’t needed.
Let me admit my bias for transparent cost financial planning. I understand that you may be one of those people who don’t like paying fees of any kind. At least none that they can see. Let me offer the following clarity for various business models.
Are you just getting the appearance of best interest, financial advice?
It’s easy to assume that you’re getting financial advice from someone called a financial advisor. But is that always the case?
Let’s start with the insurance professional that receives commissions for life, disability and long term care insurance. Do you call them a financial advisor? The word advice seems to suggest some skill, due diligence and providing services to serve your interests. However, that does not mean putting your interests ahead of their own. Clearly it is a buyer beware situation. They are compensated by commissions set by the insurance companies they represent.
Registered Representatives aka stockbrokers, etc. Do you call them a financial advisor? Most registered representatives prefer to be called financial advisors. I don’t blame them. Registered representative isn’t very descriptive. However, financial advisor is an overreach with they can only be compensated by the sale of financial products. However, most of the industry has adopted that term which makes discerning what you get from your financial professional.
Does the following scenario look like best interest, financial advice?
- Let’s say you’ve been advised or recommended to sell one investment and replace it with another. Commissions may be on a discretionary basis for buying and/or selling investments. Hypothetically, let’s say you own $100,000 of an investments. You may pay 2% to sell your investment and another 2% to buy the new one.
- Some commissions are packaged into the investment. In this case you may pay 5 ¾% to acquire the investment and ¼ of 1% of the asset value on an ongoing basis. Hypothetically, let’s say you buy $100,000 of XYZ investment. Your net investment would be $94,250. In year two, if XYZ investment has stayed at $95,250 then you will pay ¼ of 1%, $91,893.75.
Investment advisor representatives and CFP® professional financial advice
Registered investment advisors and their investment advisor representatives charge fees. People in this arrangement don’t write checks. Fees are calculated on a quarterly basis. Let’s say that advisory fee is 1%. That means that ¼ of 1% is paid quarterly in arrears. You invest $100,000 in ABC Registered Investment Advisor portfolio and 3 months later $250 is removed, given the portfolio is at the same value. You know have $99,750.
In all of these examples, I haven’t addressed the cost of the investments, acquisition costs, management costs of the investments, custodians, etc.
These financial professionals have different licenses than registered representatives. Would you rather pay for investment advice (often called financial advice) that includes a “financial plan”? Could you cut a deal and have them remove the financial plan and pay a lower fee? If not, are you actually getting an investment plan and not a financial plan. As a CERTIFIED FINANCIAL PLANNERTM professional, I believe financial planning means much more than just investing. Its expanse includes budgeting, to planning for retirement, claiming social security, to saving for and on college education, to managing your taxes and your insurance coverage, using beneficiary designations and trusts to pass assets to loved ones and charities.
Does your financial advisor charge a transparent fee for the financial advice they give you?
Commission based financial professionals don’t include advice as part of the transaction. They make recommendations that may be, but don’t have to keep your interests ahead of theirs. Don’t assume any investment professional has your best interest in mind.
We believe that is the best way to pay is a transparent fee delivered by a investment advisor representative preferably a CERTIFIED FINANCIAL PLANNERTM professional. What if you inherited a sizable IRA and and found out that you paid a million dollars in taxes that could have been avoided? What if you did your own taxes and blew a few hundred thousand in mishandling the net unrealized appreciation opportunity? Hopefully ignorance is bliss and all those who have mishandled that won’t regret founding out.
Want to learn more? Connect with us and ask for a copy of our Financial Advisor Evaluation tool. It will help you ask more of the right questions to make a more informed choice. Already have an advisor? You may find out more than you realized.